K2 
By K2 Inc. (NYSE:KTO) today reported net sales for the fourth quarter ended December 31, 2006 of $388.6 million versus $353.5 million in the prior year, an increase of 9.9%. Net sales for fiscal year 2006 were a record $1.4 billion or 6.2% higher than fiscal year 2005. Adjusted net income for the fourth quarter of 2006 was $13.4 million, or $0.25 Adjusted diluted earnings per share, compared to Adjusted net income of $14.7 million, or $0.28 in the fourth quarter of 2005. Adjusted net income for fiscal year 2006 was $44.8 million, or $0.87 Adjusted diluted earnings per share, compared to Adjusted net income of $39.0 million, or $0.78 for fiscal year 2005, an increase of 14.8% in Adjusted net income. See the K2 Inc. Statements of Operations below for a reconciliation of GAAP operating income, net income and earnings per share to Adjusted operating income, net income and earnings per share for the three and twelve months ended December 31, 2006 and December 31, 2005, respectively.
Wayne Merck, President and Chief Executive Officer, said, ?Our 2006 performance validates the strength of our diversified brand portfolio, with Adjusted diluted earnings per share growth of 11.5% and sales growth of 6.2%, driven by Action and Team Sports. The strong profit growth in Action and Team is a reflection of a significant level of new product development efforts ranging from premium alpine skis and integrated binding systems, to high performance baseball and softball bats, gloves and accessories. Our Apparel and Footwear segment for 2006 generated solid top line growth in the Marmot® and Ex Officio® brands, but profitability was impacted by higher start-up expenses in our new distribution center, by higher investment to expand our Marmot® brand, coupled with flat domestic sales for our skateboard shoes and apparel business.
For 2007, we expect to continue to benefit from our diversified product and brand offerings, with our forecast for Adjusted diluted earnings per share to grow despite an anticipated decline in winter products, due to the warm winter to date. We expect that our 2007 growth will be driven by continued gains in Team Sports, by a strong recovery in profit for Apparel and Footwear, and due to renewed profitability growth in Marine and Outdoor, which was relatively flat in 2006. We recently closed two highly strategic acquisitions of premier products and brands - Sevylor® inflatable products in December and Penn® fishing tackle in January. Although these new businesses are not material from a sales standpoint, they have the future potential to be accretive to our Marine and Outdoor segment after we have completed integration.?
Review of Comparable 2006 Sales and Profit Trends
K2's net sales for the fourth quarter of 2006 were $388.6 million versus $353.5 million in the fourth quarter of 2005, and the increase was mainly due to growth in winter product sales within the Action Sports segment. The acquisition of Sevylor Inc., a leading manufacturer of watersports and outdoor products, closed on December 11, 2006, and there was no material impact on sales in the fourth quarter since the business is seasonally slow in that period. K2's gross profit as a percentage of net sales, on an Adjusted basis as set forth in the Statements of Operations below, increased to 36.2% in the fourth quarter of 2006 compared to 35.9%, in the fourth quarter of 2005.
On February 20, 2007, the United States Circuit Court of Appeals for the Eighth Circuit issued its decision with respect to litigation concerning a dispute under a license agreement, which was in place prior to an acquisition made in 2003. As a result of the decision, K2 recorded $3.6 million in legal claims expense in excess of reserves as part of general and administrative expense in the fourth quarter of 2006. Selling, general and administrative expenses as a percentage of net sales on an Adjusted basis increased to 29.3% in the fourth quarter of 2006 compared to 27.7% in the fourth quarter of 2005, due primarily to the $3.6 million in legal expense and higher advertising and marketing expense in the Apparel and Footwear segment. These expenses were offset by a $1.7 million gain from the termination of a deferred compensation arrangement with a former executive. For the fiscal year 2006, the $3.6 million in legal expense was offset by the $1.7 million deferred compensation arrangement gain and a $1.5 million gain on the sale of a facility in the second quarter of 2006. K2's operating profit, as a percentage of net sales on an Adjusted basis for the fourth quarter of 2006 decreased to 6.8% compared to 8.2% in the comparable 2005 period, due to higher selling, general, and administrative expenses.
Fourth Quarter 2006 Segment Review
The Action Sports segment has historically included skis, snowboards, bindings, snowshoes, in-line skates and paintball products. During 2005, the paintball business declined significantly. In order to improve efficiency, K2 reorganized the paintball business to operate more in line with how the components of the Team Sports segment operates, with increased emphasis on the mass merchant and large sporting goods retailer distribution. Upon completion of the reorganization in the first quarter 2006, K2 adjusted its segment reporting to include paintball products in the Team Sports segment. The results of K2's China manufacturing operations are consolidated under the Marine and Outdoor segment. Historically, K2 has eliminated the intersegment sales from the China manufacturing operations, but has not allocated its operating profit from those intersegment sales to the other segments. In the fourth quarter of 2006, K2 implemented new financial reporting systems in its China manufacturing operations that now allow it to allocate profitability by segment. Historical numbers presented below have been restated to reflect the change in segment reporting.
Action Sports
Net sales of winter products and in-line skates totaled $178.2 million in the fourth quarter of 2006, an increase of 22.6% from the 2005 fourth quarter, due primarily to increased sales of K2® and Völkl® alpine skis and Marker® bindings. Operating profit for the fourth quarter of 2006 was $27.9 million, a 15.5% increase compared to the operating profit in the fourth quarter 2005 of $24.1 million excluding non-cash intangible charges of $108.1 million. The increase in operating profit for the fourth quarter was primarily due to strong sales growth and lower selling, general and administrative expenses as a percentage of net sales.
Marine and Outdoor
In its seasonally slowest quarter, Shakespeare® fishing tackle and monofilament and Stearns® marine and outdoor products generated net sales of $74.9 million in the fourth quarter of 2006, an increase of 6.5% from the comparable quarter in 2005. The fourth quarter sales increase was due to increased sales of fishing kits and combos, Ugly Stik® rods and immersion suits offset by declines in military antennas, cutting line, Hodgman® waders and drywear. The decline in operating income for the fourth quarter from $4.8 million in 2005 to $3.2 million in 2006 was due to lower gross margins as a percentage of net sales due to product mix, and higher selling, general and administrative expenses as a percentage of net sales.
Team Sports
Rawlings, Worth, K2 Licensed Products and JT Sports (formerly known as Brass Eagle) had net sales of $89.9 million in the 2006 fourth quarter, up 3.3% from the 2005 period. The operating loss was $0.6 million in the 2006 fourth quarter, an improvement from the loss of $2.8 million in the 2005 period excluding non-cash intangible charges and restructuring charges of $149.1 million, primarily due to higher gross margins as a percentage of net sales, and lower selling, general and administrative expenses as a percentage of net sales.
Apparel and Footwear
Apparel and Footwear had net sales of $45.6 million in the fourth quarter of 2006, a decrease of 10.4% from the 2005 period due to reduced sales of Marmot® winter outerwear products as a consequence of lower re-orders due to warm winter conditions, and due to declines in sales of skateboard shoes and apparel. The operating profit for the fourth quarter of 2006 was $1.1 million compared to an operating profit of $5.4 million in the fourth quarter of 2005 due to lower gross margins as a percentage of net sales and higher selling, general and administrative expenses as a percentage of net sales.
The segment information presented below is for the three months ended December 31: | |||||||||||
(in millions) | |||||||||||
|
Net Sales to Unaffiliated | Intersegment Sales | Operating Profit (Loss) | ||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||
| Action Sports (a) | $ 178.2 | $ 145.4 | $ 2.9 | $ 2.0 | $ 27.9 | $ (84.0) | |||||
| Marine and Outdoor | 74.9 | 70.2 | 35.4 | 32.5 | 3.2 | 4.8 | |||||
| Team Sports (b) | 89.9 | 87.0 | - | - | (0.6) | (151.9) | |||||
| Apparel and Footwear | 45.6 | 50.9 | 1.4 | 0.8 | 1.1 | 5.4 | |||||
| Total segment data | $ 388.6 | $ 353.5 | $ 39.7 | $ 35.3 | 31.6 | (225.7) | |||||
| Corporate expenses, net | (5.6) | (3.2) | |||||||||
| Interest expense | (8.7) | (8.3) | |||||||||
| Income (loss) before provision for income taxes | $ 17.3 | $ (237.2) | |||||||||
The segment information presented below is for the twelve months ended December 31: | |||||||||||
(in millions) | |||||||||||
Net Sales to Unaffiliated | Intersegment Sales | Operating Profit (Loss) | |||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||
| Action Sports (a) | $ 421.4 | $ 400.2 | $ 14.4 | $ 10.4 | $ 40.8 | $ (77.6) | |||||
| Marine and Outdoor | 407.6 | 392.2 | 178.1 | 146.8 | 46.0 | 49.0 | |||||
| Team Sports (b) | 383.4 | 347.5 | 0.1 | 0.1 | 13.7 | (148.9) | |||||
| Apparel and Footwear | 182.3 | 173.7 | 4.9 | 2.8 | 5.6 | 15.7 | |||||
| Total segment data | $ 1,394.7 | $ 1,313.6 | $ 197.5 | $ 160.1 | 106.1 | (161.8) | |||||
| Corporate expenses, net | (16.9) | (14.3) | |||||||||
| Interest expense | (30.6) | (30.4) | |||||||||
| Income (loss) before provision for income taxes | $ 58.6 | $ (206.5) | |||||||||
(a) 2005 operating loss includes non-cash intangible charges of $108.1 million. | |||||||||||
| (b) 2005 operating loss includes non-cash intangible charges of $145.1 million and restructuring charges of $4.0 million. | |||||||||||
Balance Sheet
At December 31, 2006, cash and accounts receivable increased 6.3% to $416.8 million as compared to $392.2 million at December 31, 2005. Inventories at December 31, 2006 increased 7.2% to $385.0 million from $359.0 million at December 31, 2005. The growth in accounts receivable and inventory is primarily a result of the growth in sales of 6.2% for the twelve months ended December 31, 2006 compared to the twelve months ended December 31, 2005 and due to working capital associated with the Sevylor acquisition.
The Company's total debt decreased to $392.0 million at December 31, 2006 from $437.3 million at December 31, 2005. The decrease in debt as of December 31, 2006 is primarily the result of improved profitability and cash flow from operations and from the conversion of $25 million in subordinated convertible debt to equity on November 6, 2006.
Outlook for 2007
For fiscal year 2007, K2 forecasts 2007 net sales in the range of $1.46 to $1.51 billion, GAAP diluted earnings per share in the range of $0.71 to $0.75 and Adjusted diluted earnings per share in the range of $0.90 to $0.94, in each case based on assumed fully diluted shares outstanding of 56.9 million. For the same period, K2 forecasts GAAP basic earnings per share in the range of $0.77 to $0.82 and Adjusted basic earnings per share in the range of $0.98 to $1.02, in each case based on assumed basic shares outstanding of 49.7 million. Table B provides a reconciliation of GAAP operating income to Adjusted operating income and GAAP net income to Adjusted net income for the forecast 2007 fiscal year. On a quarterly basis for 2007, K2 expects that seasonality in sales and earnings per share will be similar to the quarterly trends in 2006.
Quarterly Investor Conference Call
K2's regular quarterly earnings conference call is scheduled to begin at 1:30 p.m. Pacific Standard Time (USA), on Wednesday, March 7, 2007. K2 plans to do a live broadcast of the conference call over the Internet. Investors can listen to the live webcast at www.K2inc.net and www.fulldisclosure.com. For those who are not available for the live broadcast, the call will be archived on www.fulldisclosure.com.
Adjusted Presentation
K2 Inc. is providing historical results and forecast guidance on a financial basis in accordance with GAAP, and on an adjusted basis (?Adjusted?) that excludes the impact of certain non-cash charges including: amortization of purchased intangibles resulting from K2's acquisition activities; amortization expense associated with the increase in fair market values of the inventories of acquired companies; amortization of capitalized debt costs incurred in connection with K2's credit facilities; and non-cash stock-based compensation expense. See the K2 Inc. Statements of Operations and Table B below for a further explanation of the ?Adjusted? presentation.
K2's management believes the Adjusted financial measures for 2005 and 2006, although not indicative of future performance, are useful for comparison against K2's historical and future operations.
Unaudited Financial Information
The financial results included in this release are unaudited (other than certain 2005 results) and are subject to change based upon the results of year end audit procedures. The complete audited financial statements of K2 for the fiscal year ended December 31, 2006 will be included in K2 Inc.'s Annual Report on Form 10-K to be filed with the SEC on or before March 16, 2007.
About K2 Inc.
K2 Inc. is a premier, branded consumer products company with a portfolio of leading brands including Shakespeare®, Penn®, Pflueger®, Sevylor® and Stearns® in the Marine and Outdoor segment; Rawlings®, Worth® and Brass Eagle® in the Team Sports segment; K2®, Völkl ®, Marker® and Ride® in the Action Sports segment; and Adio®, Marmot® and Ex Officio® in the Apparel and Footwear segment. K2's diversified mix of products is used primarily in team and individual sports activities such as fishing, watersports activities, baseball, softball, alpine skiing, snowboarding and in-line skating. Among K2's other branded products are Hodgman® waders, Miken® softball bats, Tubbs® and Atlas® snowshoes, JT® and Worr Games® paintball products, Planet Earth® apparel and Sospenders® personal floatation devices.
Adio®, Atlas®, Brass Eagle®, Ex Officio®, Hodgman®, JT®, K2®, Marker®, Marmot®, Penn®, Pflueger®, Planet Earth®, Rawlings®, Ride®, Sevylor®, Shakespeare®, Sospenders®, Stearns®, Tubbs®, Volkl®, Worth® and Worr Games® are trademarks or registered trademarks of K2 Inc. or its subsidiaries in the United States or other countries.
Safe Harbor Statement
This news release includes forward-looking statements. K2 cautions that these statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including but not limited to, K2's ability to successfully execute its acquisition plans and growth strategy, integration of acquired businesses, weather conditions, consumer spending, continued success of manufacturing in China, global economic conditions, product demand, financial market performance, outcome of material litigation and other risks described in K2's most recent annual report on Form 10-K, previous quarterly reports on Form 10-Q, and current reports on Form 8-K, each as filed with the Securities and Exchange Commission. K2 cautions that the foregoing list of important factors is not exclusive, any forward-looking statements included in this news release is made as of the date of this news release, and K2 does not undertake to update any forward-looking statement.
K2 INC. | |||||||||||
(in thousands, except for per share figures) | |||||||||||
Three Months |
Three Months | ||||||||||
| GAAP (a) | Non-GAAP | GAAP (a) | Non-GAAP | ||||||||
| (unaudited) | Adjustments | Adjusted | (unaudited) | Adjustments | Adjusted | ||||||
| Net sales | $ 388,559 | $ - | $ 388,559 | $ 353,530 | $ - | $ 353,530 | |||||
| Cost of products sold | 248,059 | (5) | (b) | 248,054 | 229,591 | (2,937) | (b) | 226,654 | |||
| Gross profit | 140,500 | 5 | 140,505 | 123,939 | 2,937 | 126,876 | |||||
| Selling expenses | 68,781 | (39) | (c) | 68,742 | 59,891 | - | 59,891 | ||||
| General and administrative expenses | 46,771 | (1,548) | (d) | 45,223 | 40,264 | (2,365) | (d) | 37,899 | |||
| Non-cash intangible impairment charges | - | - | - | 253,154 | (253,154) | (e) | - | ||||
| Operating income (loss) | 24,948 | 1,592 | 26,540 | (229,370) | 258,456 | 29,086 | |||||
| Interest expense | 8,746 | (1,967) | (f) | 6,779 | 8,295 | (626) | (f) | 7,669 | |||
| Other income, net | (1,105) | (1,105) | (419) | (419) | |||||||
| Income (loss) before provision (benefit) for income taxes | 17,307 | 3,559 | 20,866 | (237,246) | 259,082 | 21,836 | |||||
| Provision for income tax expense (benefit) | 6,922 | 563 | (g) | 7,484 | (5,168) | 12,344 | (g) | 7,176 | |||
| Net income (loss) | $ 10,385 | $ 2,997 | $ 13,382 | $ (232,078) | $ 246,738 | $ 14,660 | |||||
| Basic shares outstanding | 48,481 | - | 48,481 | 46,364 | - | 46,364 | |||||
| Diluted shares outstanding | 55,916 | - | 55,916 | 46,364 | 8,632 | (h) | 54,996 | ||||
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© Business Wire - 2007
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